Copper Heading to Fresh Peaks on Strong Demad from China; Aluminum is a Coiled Spring!

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1. I am keeping a constant eye on demand from China. While I agree with the Rio Tinto economist's opinion that China has essentially decoupled from the west, I am taking nothing for granted in this complex global economic crisis. Every credible report that indicates strong medium-term demand from China is like nod from the lifeguard that it's still safe to swim in the soft metal waters. I've been seeing a lot of similar mutually-reinforcing reports lately, so I'm feeling great about the status of metals demand from China at least through 2009, and likely through 2012 unless the picture changes drastically.

2. I just published an article about the prospects for higher copper prices yesterday afternoon. Did you catch it? Please click here if not, and then return. The price is near its peak now even though China has been out of the market for several months drawing down a huge supply they purchased at cheaper prices. Globally, there is only a few weeks' supply of copper available, so renewed buying from China will likely tip the scale into deficit.... and we recently saw what supply deficit did for coal prices.

3. Aluminum. This article provided further confirmation of everything I presented in my recent article on Aluminum, plus the added news that the top 20 Chinese aluminum producers are cutting production by 5-10% in order to conserve electricity and drive up aluminum prices. Wow. Remember, ACH is a state-run enterprise. This is not a voluntary hit to their bottom line, but rather a reflection of the severity of the coal/electricity shortfall in China, and a strategic move to cause a quick upward correction in the price of aluminum to make the business more profitable in a hurry. ACH remains my strongest buy recommendation outside of precious metals, and if the market were to punish shares on this announcement of production cutbacks, that is your double-down time. :)

LONDON, July 10 (Reuters) - Copper prices could hit fresh record highs this year as the Chinese economy continues to expand despite a slowdown in the United States, the chief economist of miner Rio Tinto said on Thursday.

"I think the conditions still exist for yet another peak in the prices of most metals," Vivek Tulpule, chief economist of the world's second largest miner by market capitalisation, told Reuters in an interview.

Asked whether copper prices, which hit a record high of $8,940 per tonne last week, could surge to further peaks this year, Tulpule said: "Yes."

Industrial action at the world's top mines pushed copper to record highs, but the demand from China, where the market looked to take up the slack amid a U.S. slowdown has been weak so far this year.

This is due to the stocks they've built and once those stocks are depleted -- as the underlying demand remains robust -- the Chinese are likely to come back to the market, Tulpule said.

"Supplies remain constrained and there's scope for demand pick up once the Chinese stocks, which have been built in the past, are taken away ... In a few months time, there will be conditions for strong buying," he said.

Tulpule said he believed the Chinese economy was "decoupling" from the West, and that it would still grow strongly despite a slowdown in the United States, ensuring strong demand for metals.

"The Chinese economy is pretty resilient to U.S. slowdown ... We don't see a big effect coming back into commodity markets," he said.

Another bull market could be aluminium. Tulpule said a shortage of electricity was a key issue for the market for energy-intensive aluminium, and it was affecting production.

Tulpule's comments were confirmed by reports from China, where the top 20 aluminium producers will cut production 5-10 percent from July to push up prices and reduce power consumption. [ID:nSP157888]

The news pushed aluminium to a fresh record high of $3,350 per tonne, exceeding a previous all-time high touched earlier this week.

Rio Tinto managed to secure a record price hike -- up to 96.5 percent -- in this year's iron ore contract talks with the Chinese steelmakers as the bottleneck in iron ore shipping continued to buoy prices.

"We've had a very good price rise this year, entirely consistent with fundamentals," Tulpule said, but he declined to predict how much the price hike would be for next year.

The demand for steel, particularly in China, was strong with the construction boom going on and a shortage of key raw materials meant higher prices in the years to come, he said.

"What we see over 1-3 years is pretty robust conditions ... In the long run prices are probably going to be much higher."

Great post Sinch. I completely agree with you on copper. I have chosen to play what I believe will be continued strong demand for it through FCX. It will be very, very interesting to see how the Chinese economy holds up after the Olympics with much of the West weakening. I am personally leaning towards the decoupling camp, with the disclaimer that I believe Chinese demand will slow but still be very strong when compared to the rest of the world.

Do you really think aluminum can be depended on? I always saw lots of volatility. Bauxite's cool and all, but will the energy crunch directly correlate to high prices? Seems like there is always something that ruins the party for aluminum (energy, water shortage, labor problems...)

Final Thought, What happens to aluminum in the UK anyway? How does it become "AL You Min E um"

I'll drink to higher copper prices. I got into FCX back when it was under $90. Wouldn't mind steel prices rising, either. I have large holdings of the actual metal.

I doubt the whole Chinese decoupling story, though. What is their economy geared for? Export. What are their two largest export markets? Last I checked, it was the US and Europe. A lot of their need for infrastructure disappears if the export market softens, in my opinion.

Yes, in the medium term I strongly believe Aluminum can be depended upon. We are about to see a huge price correction that will supercede production cost issues. Individual companies are being affected around the world by the various supply constraints I outlined in the first article (linked in bullet #3 above), and when you put them all together it becomes clear the prices have to rise substantially. China, facing coal shortages and resulting electricity shortage, has opted to leverage that reality into forcing the price upward. Supply is so thin that every headline about possible supply disruptions from this point forward will be seen very visibly on the commodity price.

The downside risk... since there is always some... is that worldwide coal production cannot keep pace with demand to the extent that serious power shortages affect multiple regions at once. This could curtail aluminum production regardless of the price, and that could hurt individual companies. That being said, China has major coal reserves, anbd you can bet they are fast-tracking repairs from the earthquake and storms, and will do what is necessay to ensure adequate electricity supply going forward... including the possibility of major deals with Australian operations. That's why ACH is my choice.

Sweet! Like I said elsewhere, my entry price for ACH is over $50! I'm not sweating even a drop. :) I would have loved to double down at these levels, but unfortunately when I publish on a given stock there is a waiting period before I can trade. That's why ACH is my gift to you guys... a sacrifice I'm more than willing to make as long as I'm able to help some Fools.

Besides... unfortunately I find myself with no cash on the sidelines. :) I'm sure not selling shares of CDE nor any other manipulated junior. I am 100% in on commodities. Go gold, silver, copper, aluminum, coal, iron ore, and natural gas! :)

Thanks! I'm more than happy to be riding the commodity train with you guys! I just wish we didn't have to watch the country's economy fall apart in the meantime. :( I'm not rooting for gold or any other commodity... I'm rooting for people.

But when reality hits you square in the face and we're powerless to stop it, common sense dictates that we trade accordingly. It's a weird phenomenon, though, this unavoidable juxtaposition between excitement about making wise investments and watching assets grow for your future and that of one's family, vs. maintaining a humble awareness of the full spectrum of ramifications that this whole event holds in store for the people of this world.

The resulting emotional roller coaster ride is exhausting. Sorry to ramble on about it. But I'm guessing you all know what I'm talking about. :)

Alcoa Inc. (AA) reported earnings Tuesday night for the second quarter of 2008 (ending 6/30/08), and held a conference call to discuss the results. The results beat estimates and the stock was up 4.5% in pre market trading Wednesday to $33.80.

Financial Highlights

Revenues - $7.6 billionNet income - $546 million EPS - $0.66

Cash - $815 millionDebt to capital - 30.6%Year to date AA has repurchased 18.3 million sharesCapital expenditures - $1.5 billion year to date - $3.6 billion expected for the year

Shipments of aluminum products (metric tons) - 1,407,000

Management Comments

Industry Fundamentals

"Aluminum prices have continued to show strength and those higher prices are supported by a host of factors....global supply and demand is essentially balanced; even though North America and Europe are experiencing significant weakness in specific end markets, global consumption remains robust. Secondly, energy costs and input prices have continued to escalate for the industry as a whole...And lastly, global mega-trends will continue to increase the per capita consumption of aluminum, as well as provide a catalyst for material substitution."

"...energy supply constraints have caused smelter curtailments as well as postponements to greenfield expansions."

"caustic energy and bauxite account for approximately 65% of our refining costs, while alumina energy and carbon account for approximately 70% of our smelting costs...From the first half of last year to the first of this year, these costs have increased between 35% to over 80%."

"The energy situation, along with the inflationary pressures on many materials, has increased the cost of alumina refining and aluminum smelting by about 20% to 35% between 2005 and 2007, and we would expect a similar rate increase this year."

Relative Cost Positioning

"Our own research indicates that the industry cost curves for both refining and smelting have seen double-digit increases in both 2007 and 2006. Through brownfield expansions and operational improvements, we see our position on the refining cost curves improving by approximately [eight points] from 38 to 30 over the last two years while we maintained our midpoint status on the smelting cost curve."

Rockdale

"In June, we announced the curtailment of 120,000 tons of annual production in Rockdale. This was driven by an increasingly unreliable power supply that created financial and operational hardships to a point where we could not justify continuing full operation." (Rockdale is a smelter located in Texas - Luminant supplies power and prices spiked to as much as $2,000 to $4,000 per megawatt hour during peak hours.)

Outlook

"Aluminum consumption will increase by approximately 8% and given the supply interruptions in China, South Africa and the U.S. to name a few, we see the global demand/supply picture to be generally in balance."

North America - "Automotive production is projected to be at its lowest level in two decades. Similarly, heavy truck and trailer production are anticipated to remain below already weak 2007 levels. Commercial building and construction activity is showing signs of the decline that we have been anticipating due to the slowing business cycle and also to the tighter credit conditions."

Europe - "The end markets in Europe have held up, although signs of softness, especially in building and construction and truck and trailer, are becoming evident. Automotive production has held up and is expected to show some increase for the year."

Asia - "End markets in China continue to be showing strength. We expect consumption in China to increase approximately 20% this year."

So 20% for China? makes ACH look better, with their home turf advantage. -GNUBEE

I interpret that to mean that there is no surplus, which coming from a thin but nonetheless actual surplus, going into supply/demand balance is a major development, and one step away from deficit. Given China's announcement today, I believe that represents the beginning of supply deficit, and therefore the beginning of volatile movements in the prices for both alumina and finished aluminum.